Nifty stocks with low PE multiples and high Earnings per share: Check this list

Investors are constantly on the lookout for stocks at a lower price. Finding high-quality equities at low prices is a critical component of building wealth in the stock market.

Investors use many indicators to find stocks with lower prices that they believe will turn out to be multibaggers.

There is one simple ratio, called the P/E ratio, which many Investors use to identify whether the stock of a company is selling at a cheap or expensive.

What is P/E Ratio?

Price to Earnings Multiple is the ratio of the share price of a stock to its earnings per share (EPS). It provides an indication of whether a stock at its current market price is expensive or cheap.

The P/E ratio is the price that investors are willing to pay for one rupee of earnings per share (EPS) of a company, if future earnings are predicted to rise, the share price rises, and vice versa.

If the share price grows much faster than earnings, the PE ratio rises. When the share price declines much faster than earnings, the PE ratio falls.

However, If the P/E multiple has risen considerably while earnings have remained the same, there is a higher chance that the stock price will correct, say experts.

How this Ratio is Calculated?

A PE ratio is calculated by dividing the market price per share by the earnings per share.

For example, if the current market price of the stock of ABC Ltd. is Rs. 500 and the company’s earnings per share are Rs. 50, Then the price-to-earnings ratio of ABC Ltd. will be calculated as follows:

500/50 = 10 P/E

From the above calculation, it is estimated that the P/E ratio of ABC Ltd. is ten times, which means that investors are willing to pay Rs.10 for every rupee of the company's earnings.

Commonly, a company with a high P/E ratio is expensive compared with a company with a low P/E ratio. This is because, with a high P/E ratio or multiple, one is paying a larger multiple against a company’s earnings.

Types of PE ratios

Trailing Twelve Months (TTM) PE: TTM PE is calculated by dividing the current share price by the last four quarterly earnings per share (EPS). TTM PE is easy to calculate because companies declare the financial results, including EPS, every quarter.

Forward PE: Forward PE is the current share price divided by the projected EPS over the next 4 quarters. Calculating future PE needs knowledge because it entails estimating sales, margins, P&L, and EPS. Analysts estimate forecast earnings and PE ratios based on guidance from corporate management and their own research.

Here are some Nifty stocks with low PE and with high EPS. 

How does Industry P/E Ratio work?

Industry PE ratios are the average (mean) P/E ratio of all the companies that operate within a certain industry. Industry PE ratio provides an idea to investors about the average PE ratio of all the companies in that industry, which are listed on the stock exchanges.

For example, if we were to look up the P/E ratio of XYZ Automobile Company, we would want to see how it compares to its peers.

The Industry PE stands at 20.5, while the XYZ P/E stands at 30.5, which is above the Industry PE.

This means that investors are willing to pay more for XYZ per earnings per share than for other automobile manufacturers.

If investors believe that XYZ is a promising company that is disrupting the automobile industry and will continue to grab market share from competitors, then paying a higher price may be good.

Some industries trade at an average of 15 times earnings, while others trade at 30 times. It’s because some industries have different expectations.

Industry PE can be determined in a variety of ways. According to some sources, it is calculated as a simple average of the PE ratios of the industry's constituent companies.

Other sources calculate it as the market-capitalization-weighted average of the PE ratios of the constituent companies. Simply put, it is the ratio of the entire market value of all companies in the industry to their net earnings.

However, different investors have different beliefs about using the industry PE ratio in their stock selection process.

What is a good P/E Ratio?

Experts say that one should look at the historical PEs of the stock, and see if the current PE is near the higher end of the range or near the lower end of the range. If the stock is trading near the lower end of the range, then it can be a good investment opportunity subject to other factors.

Note: This story is for educational purposes only. Please speak to a financial advisor before investing.